10-Q 1 d172091d10q.htm 10-Q 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one):

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______ TO _______

COMMISSION FILE NUMBER: 814-00237

 

 

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   54-2040781

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1521 WESTBRANCH DRIVE, SUITE 100  
MCLEAN, VIRGINIA   22102
(Address of principal executive office)   (Zip Code)
 

(703) 287-5800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value per share   GLAD   The Nasdaq Global Stock Market LLC
5.375% Notes due 2024, $25.00 par value per note   GLADL   The Nasdaq Global Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of May 3, 2021 was 33,649,119.

 

 

 


GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS

 

PART I.   FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited)   
  Consolidated Statements of Assets and Liabilities as of March 31, 2021 and September 30, 2020      2  
  Consolidated Statements of Operations for the three and six months ended March 31, 2021 and 2020      3  
  Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2021 and 2020      5  
  Consolidated Statements of Cash Flows for the six months ended March 31, 2021 and 2020      6  
  Consolidated Schedules of Investments as of March 31, 2021 and September 30, 2020      7  
  Notes to Consolidated Financial Statements      19  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      41  
  Overview      41  
  Results of Operations      45  
  Liquidity and Capital Resources      55  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      62  
Item 4.   Controls and Procedures      62  
PART II.   OTHER INFORMATION   
Item 1.   Legal Proceedings      63  
Item 1A.   Risk Factors      63  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      64  
Item 3.   Defaults Upon Senior Securities      64  
Item 4.   Mine Safety Disclosures      64  
Item 5.   Other Information      64  
Item 6.   Exhibits      65  

SIGNATURES

     66  

 

1


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     March 31,
2021
    September 30,
2020
 

ASSETS

    

Investments, at fair value:

    

Non-Control/Non-Affiliate investments (Cost of $435,844 and $427,798, respectively)

   $ 430,943     $ 401,047  

Affiliate investments (Cost of $48,322 and $38,322, respectively)

     43,808       33,179  

Control investments (Cost of $28,344 and $28,527, respectively)

     18,016       16,174  

Cash and cash equivalents

     4,953       2,420  

Restricted cash and cash equivalents

     121       49  

Interest receivable, net

     2,581       3,001  

Due from administrative agent

     2,686       2,103  

Deferred financing costs, net

     262       372  

Other assets, net

     849       832  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 504,219     $ 459,177  
  

 

 

   

 

 

 

LIABILITIES

    

Borrowings, at fair value (Cost of $41,200 and $128,000, respectively)

   $ 41,190     $ 127,650  

Notes payable, net of unamortized deferred financing costs of $2,476 and $2,428, respectively

     186,337       93,885  

Accounts payable and accrued expenses

     810       377  

Interest payable

     2,159       1,181  

Fees due to Adviser(A)

     1,542       1,686  

Fee due to Administrator(A)

     496       329  

Other liabilities

     797       326  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   $ 233,331     $ 225,434  
  

 

 

   

 

 

 

Commitments and contingencies(B)

    

NET ASSETS

    

Common stock, $0.001 par value per share, 44,560,000 and 44,560,000 shares authorized, respectively, and 33,396,426 and 31,566,850 shares issued and outstanding, respectively

   $ 33     $ 32  

Capital in excess of par value

     382,480       367,125  

Cumulative net unrealized depreciation of investments

     (19,743     (44,247

Cumulative net unrealized appreciation of other

     10       350  

Over distributed net investment income

     (74     (39

Accumulated net realized losses

     (91,818     (89,478
  

 

 

   

 

 

 

Total distributable loss

     (111,625     (133,414
  

 

 

   

 

 

 

TOTAL NET ASSETS

   $ 270,888     $ 233,743  
  

 

 

   

 

 

 

NET ASSET VALUE PER COMMON SHARE

   $ 8.11     $ 7.40  
  

 

 

   

 

 

 

 

(A) 

Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

(B)

Refer to Note 10—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

2


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2021     2020     2021     2020  

INVESTMENT INCOME

        

Interest income

        

Non-Control/Non-Affiliate investments

   $ 9,967     $ 9,023     $ 20,189     $ 18,671  

Affiliate investments

     1,064       1,146       1,974       2,192  

Control investments

     410       413       825       835  

Cash and cash equivalents

     —         8       —         16  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income (excluding PIK interest income)

     11,441       10,590       22,988       21,714  

PIK interest income

        

Non-Control/Non-Affiliate investments

     445       412       980       744  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total PIK interest income

     445       412       980       744  

Total interest income

     11,886       11,002       23,968       22,458  

Success fee income

        

Non-Control/Non-Affiliate investments

     —         350       —         350  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total success fee income

     —         350       —         350  

Dividend income

        

Non-Control/Non-Affiliate investments

     209       2       575       166  

Control investments

     30       24       252       210  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     239       26       827       376  

Prepayment fee income

        

Non-Control/Non-Affiliate investments

     700       —         900       90  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total prepayment fee income

     700       —         900       90  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income

     60       114       72       377  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     12,885       11,492       25,767       23,651  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Base management fee(A)

     2,095       1,840       4,097       3,692  

Loan servicing fee(A)

     1,396       1,443       2,744       2,846  

Incentive fee(A)

     1,381       1,227       2,748       2,621  

Administration fee(A)

     332       358       687       729  

Interest expense on borrowings and notes payable

     2,822       2,582       5,390       5,119  

Amortization of deferred financing costs

     338       363       756       724  

Professional fees

     160       267       378       452  

Other general and administrative expenses

     238       313       562       668  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses, before credits from Adviser

     8,762       8,393       17,362       16,851  

Credit to base management fee - loan servicing fee(A)

     (1,396     (1,443     (2,744     (2,846

Credits to fees from Adviser - other(A)

     (880     (2,005     (1,530     (3,318
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of credits

     6,486       4,945       13,088       10,687  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INVESTMENT INCOME

     6,399       6,547       12,679       12,964  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

        

Net realized gain (loss):

        

Non-Control/Non-Affiliate investments

     63       (3,070     (2,080     (7,504

Control investments

     —         —         (1     —    

Other

     (1,152     —         (1,160     (1,407
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized gain (loss)

     (1,089     (3,070     (3,241     (8,911

Net unrealized appreciation (depreciation):

        

Non-Control/Non-Affiliate investments

     13,963       (25,988     21,850       (23,246

Affiliate investments

     724       (4,265     629       (4,405

Control investments

     1,322       (1,183     2,025       (3,646

Other

     (20     184       (340     167  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net unrealized appreciation (depreciation)

     15,989       (31,252     24,164       (31,130
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     14,900       (34,322     20,923       (40,041
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ 21,299     $ (27,775   $ 33,602     $ (27,077
  

 

 

   

 

 

   

 

 

   

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

3


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 

BASIC AND DILUTED PER COMMON SHARE:

          

Net investment income

   $ 0.20      $ 0.21     $ 0.39      $ 0.42  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 0.65      $ (0.89   $ 1.03      $ (0.87
  

 

 

    

 

 

   

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted

     32,765,980        31,145,484       32,428,089        30,827,780  

 

(A) 

Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

 

4


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)

 

     2021     2020  

NET ASSETS, SEPTEMBER 30

   $ 233,743     $ 249,330  

OPERATIONS

    

Net investment income

     6,280       6,417  

Net realized gain (loss) on investments

     (2,144     (4,434

Realized gain (loss) on other

     (8     (1,407

Net unrealized appreciation (depreciation) of investments

     8,495       139  

Net unrealized depreciation (appreciation) of other

     (320     (17
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     12,303       698  
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income ($0.19 per share and $0.21 per share, respectively)(A)

     (6,100     (6,417

Distributions to common stockholders from return of capital ($0.01 per share and $0.00 per share, respectively)(A)

     (180     —    
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (6,280     (6,417
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     7,491       7,315  

Discounts, commissions and offering costs for issuance of common stock

     (140     (137
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital transactions

     7,351       7,178  

NET INCREASE (DECREASE) IN NET ASSETS

     13,374       1,459  
  

 

 

   

 

 

 

NET ASSETS, DECEMBER 31

   $ 247,117     $ 250,789  
  

 

 

   

 

 

 

OPERATIONS

    

Net investment income

     6,399       6,547  

Net realized gain (loss) on investments

     63       (3,070

Realized gain (loss) on other

     (1,152     —    

Net unrealized appreciation (depreciation) of investments

     16,009       (31,436

Net unrealized depreciation (appreciation) of other

     (20)       184  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     21,299       (27,775
  

 

 

   

 

 

 

DISTRIBUTIONS

    

Distributions to common stockholders from net investment income ($0.18 per share and $0.21 per share, respectively)(A)

     (5,714     (6,547

Distributions to common stockholders from return of capital ($0.02 per share and $0.00 per share, respectively)(A)

     (685     —    
  

 

 

   

 

 

 

Net decrease in net assets from distributions

     (6,399     (6,547
  

 

 

   

 

 

 

CAPITAL TRANSACTIONS

    

Issuance of common stock

     9,037       1,482  

Discounts, commissions and offering costs for issuance of common stock

     (166     (26
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital transactions

     8,871       1,456  

NET INCREASE (DECREASE) IN NET ASSETS

     23,771       (32,866
  

 

 

   

 

 

 

NET ASSETS, MARCH 31

   $ 270,888     $ 217,923  
  

 

 

   

 

 

 

 

(A)

Refer to Note 9 – Distributions to Common Stockholders in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

5


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

     Six Months Ended March 31,  
     2021     2020  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net increase (decrease) in net assets resulting from operations

   $ 33,602     $ (27,077

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used) in operating activities:

    

Purchase of investments

     (101,098     (72,327

Principal repayments on investments

     78,456       36,103  

Net proceeds from sale of investments

     3,690       2,933  

Increase in investments due to PIK interest

     (1,081     (711

Net change in premiums, discounts and amortization

     181       (251

Net realized loss (gain) on investments

     2,081       7,515  

Net realized loss (gain) on other

     1,160       1,407  

Net unrealized depreciation (appreciation) of investments

     (24,504     31,297  

Net unrealized appreciation (depreciation) of other

     340       (167

Changes in assets and liabilities:

    

Amortization of deferred financing fees

     756       724  

Decrease (increase) in interest receivable, net

     420       (819

Decrease (increase) in funds due from administrative agent

     (583     1,878  

Decrease (increase) in other assets, net

     (76     (76

Increase (decrease) in accounts payable and accrued expenses

     433       (165

Increase (decrease) in interest payable

     978       360  

Increase (decrease) in fees due to Adviser(A)

     (144     (1,473

Increase (decrease) in fee due to Administrator(A)

     167       185  

Increase (decrease) in other liabilities

     471       46  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (4,751     (20,618
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from line of credit

     157,600       117,200  

Repayments on line of credit

     (244,400     (92,000

Redemption of preferred stock

     —         (51,750

Proceeds from issuance of long term debt

     150,000       38,813  

Redemption of long term debt

     (57,500     —    

Financing fees

     (1,946     (1,461

Proceeds from issuance of common stock

     16,528       8,797  

Discounts, commissions and offering costs for issuance of common stock

     (247     (132

Distributions paid to common stockholders

     (12,679     (12,964
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     7,356       6,503  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS

     2,605       (14,115

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD

     2,469       15,748  
  

 

 

   

 

 

 

CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD

   $ 5,074     $ 1,633  
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 4,412     $ 4,759  
  

 

 

   

 

 

 

 

(A)

Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

6


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2021

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(M) – 159.1%

        

Secured First Lien Debt – 93.1%

        

Aerospace and Defense – 20.6%

        

Antenna Research Associates, Inc. – Term Debt (L + 10.0%, 12.0% Cash, 4.0% PIK, Due 11/2023)(E)

   $ 11,846      $ 11,846      $ 11,846  

Ohio Armor Holdings, LLC – Line of Credit, $5,000 available (L + 8.0%, 9.0% Cash, Due 2/2026)(C)

     —          —          —    

Ohio Armor Holdings, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 2/2026)(C)

     23,500        23,500        23,500  

SpaceCo Holdings, LLC – Line of Credit, $1,500 available (L + 6.5%, 7.5% Cash, Due 12/2025)(C)

     500        500        500  

SpaceCo Holdings, LLC – Term Debt (L + 6.5%, 7.5% Cash, Due 12/2025)(C)

     19,875        19,673        19,875  
     

 

 

    

 

 

 
        55,519        55,721  

Beverage, Food, and Tobacco – 9.6%

        

Café Zupas – Line of Credit, $4,000 available (L + 7.4%, 8.9% Cash, Due 12/2024)(C)

     —          —          —    

Café Zupas – Delayed Draw Term Loan, $3,030 available (L + 7.4%, 8.9% Cash, Due 12/2024)(C)

     1,970        1,970        1,965  

Café Zupas – Term Debt (L + 7.4%, 8.9% Cash, Due 12/2024)(C)

     24,000        24,000        23,940  
     

 

 

    

 

 

 
        25,970        25,905  

Buildings and Real Estate – 0.6%

        

GFRC 360, LLC – Line of Credit, $500 available (L + 8.0%, 9.0% Cash, Due 9/2021)(C)

     700        700        691  

GFRC 360, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 9/2021)(C)

     1,000        1,000        988  
     

 

 

    

 

 

 
        1,700        1,679  

Diversified/Conglomerate Service – 25.0%

        

DKI Ventures, LLC – Line of Credit, $2,500 available (L + 8.3%, 9.3% Cash, 2.0% PIK, Due 12/2021)(C)

     —          —          —    

DKI Ventures, LLC – Term Debt (L + 8.3%, 9.3% Cash, 2.0% PIK, Due 12/2023)(C)

     5,681        5,662        4,829  

ENET Holdings, LLC – Term Debt (L + 8.8%, 10.2% Cash, Due 12/2022)(C)

     1,000        1,000        770  

ENET Holdings, LLC – Term Debt (L + 8.8%, 10.2% Cash, Due 4/2025)(C)

     29,000        29,000        22,330  

MCG Energy Solutions, LLC – Line of Credit, $3,000 available (L + 7.5%, 8.5% Cash, Due 3/2026)(C)

     —          —          —    

MCG Energy Solutions, LLC – Term Debt (L + 7.5%, 8.5% Cash, 1.5% PIK, Due 3/2026)(C)

     20,000        20,000        20,000  

MCG Energy Solutions, LLC – Delayed Draw Term Loan, $3,000 available (L + 7.5%, 8.5% Cash, 1.5% PIK, Due 3/2026)(C)

     —          —          —    

R2i Holdings, LLC – Line of Credit, $1,171 available (8.0% Cash, Due 12/2021)(C)(F)

     829        829        806  

R2i Holdings, LLC – Term Debt (8.0% Cash, Due 12/2023)(C)(F)

     19,500        19,500        18,964  
     

 

 

    

 

 

 
        75,991        67,699  

Healthcare, Education, and Childcare – 25.1%

        

ALS Education, LLC – Line of Credit, $4,000 available (L + 7.5%, 9.0% Cash, Due 5/2025)(C)

     —          —          —    

ALS Education, LLC – Term Debt (L + 7.5%, 9.0% Cash, Due 5/2025)(C)

     21,010        21,010        21,063  

Effective School Solutions LLC – Line of Credit, $2,000 available (L + 7.8%, 8.8% Cash, Due 12/2025)(C)

     —          —          —    

Effective School Solutions LLC – Term Debt (L + 7.8%, 8.8% Cash, Due 12/2025)(C)

     19,000        19,000        18,976  

Effective School Solutions LLC – Delayed Draw Term Loan, $3,200 available (L + 7.8%, 8.8% Cash, Due 12/2025)(C)

     —          —          —    

EL Academies, Inc. – Delayed Draw Term Loan, $0 available (L + 8.0%, 9.0% Cash, Due 8/2022)(C)

     16,000        15,990        15,960  

EL Academies, Inc. – Term Debt (L + 8.0%, 9.0% Cash, Due 8/2022)(C)

     12,000        11,987        11,970  
     

 

 

    

 

 

 
        67,987        67,969  

Machinery – 2.2%

        

Arc Drilling Holdings LLC – Line of Credit, $875 available (L + 8.0%, 9.3% Cash, Due 11/2022)(C)

     125        125        122  

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 10.8% Cash, 3.0% PIK, Due 11/2022)(C)

     5,885        5,885        5,715  

Precision International, LLC – Line of Credit, $500 available (L + 7.5%, 8.5% Cash, Due 9/2021)(C)

     —          —          —    

Precision International, LLC – Term Debt (10.0% Cash, Due 9/2021)(C)(F)

     286        286        283  
     

 

 

    

 

 

 
        6,296        6,120  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 7.3% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 10.0%

        

B+T Group Acquisition, Inc.(S) – Line of Credit, $0 available (L + 11.0%, 13.0% Cash, Due 12/2021)(C)(H)

     1,200        1,200        1,113  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2021)(C)(H)

     6,000        6,000        5,565  

NetFortris Corp. – Term Debt (L + 9.0%, 9.5% Cash, 2.0% PIK, Due 4/2021)(C)

     23,312        23,312        20,398  
     

 

 

    

 

 

 
        30,512        27,076  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 264,082      $ 252,169  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

7


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2021

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

Secured Second Lien Debt – 48.7%

        

Automobile – 3.6%

        

Sea Link International IRB, Inc. – Term Debt (11.3% Cash, 2.0% PIK, Due 3/2023)(C)(F)

   $ 10,783      $ 10,783      $ 9,758  

Beverage, Food, and Tobacco – 1.3%

        

8th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 7.9% Cash, Due 10/2026)(D)

     3,682        3,702        3,636  

Cargo Transportation – 11.5%

        

AG Transportation Holdings, LLC – Term Debt (L + 10.0%, 13.3% Cash, Due 12/2021)(Q)

     13,000        12,983        13,184  

American Trailer Rental Group LLC – Term Debt (L + 8.9%, 10.4% Cash, Due 8/2025)(C)

     18,000        18,000        18,090  
     

 

 

    

 

 

 
        30,983        31,274  

Chemicals, Plastics, and Rubber – 3.7%

        

Phoenix Aromas & Essential Oils, LLC – Term Debt (L + 10.3%, 11.3% Cash, Due 5/2024)(C)

     10,012        9,982        10,012  

Diversified/Conglomerate Manufacturing – 1.6%

        

Tailwind Smith Cooper Intermediate Corporation – Term Debt (L + 9.0%, 9.1% Cash, Due 5/2027)(D)

     5,000        4,789        4,234  

Diversified/Conglomerate Service – 12.1%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 4/2026)(D)(U)

     3,000        2,956        2,700  

Drive Chassis Holdco, LLC – Term Debt (L + 8.3%, 8.4% Cash, Due 4/2026)(D)

     5,000        4,801        5,062  

Gray Matter Systems, LLC – Term Debt (12.0% Cash, Due 12/2026)(C)(F)

     8,100        8,061        8,070  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 10.3% Cash, Due 5/2025)(D)(U)

     4,000        3,950        3,700  

Prophet Brand Strategy – Delayed Draw Term Loan, $5,000 available (L + 8.5%, 10.5% Cash, Due 2/2025)(C)

     —          —          —    

Prophet Brand Strategy – Term Debt (L + 8.5%, 10.5% Cash, Due 2/2025)(C)

     13,000        13,000        13,130  
     

 

 

    

 

 

 
        32,768        32,662  

Healthcare, Education, and Childcare – 2.1%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.4%, 9.4% Cash, Due 6/2025)(D)

     3,000        2,972        2,850  

Medical Solutions Holdings, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 6/2025)(D)

     3,000        2,952        2,850  
     

 

 

    

 

 

 
        5,924        5,700  

Home and Office Furnishings, Housewares and Durable Consumer Products – 3.6%

        

Belnick, Inc. – Term Debt (11.0% Cash, Due 8/2023)(C)(F)

     10,000        10,000        9,850  

Machinery – 0.4%

        

CPM Holdings, Inc. – Term Debt (L + 8.3%, 8.4% Cash, Due 11/2026)(D)

     1,000        1,000        980  

Oil and Gas – 8.8%

        

Imperative Holdings Corporation – Term Debt (L + 10.3%, 12.3% Cash, 1.8% PIK, Due 9/2022)(C)

     27,827        27,827        23,862  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 137,758      $ 131,968  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

8


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2021

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
    Cost      Fair Value  

Unsecured Debt – 0.0%

       

Diversified/Conglomerate Service – 0.0%

       

Frontier Financial Group Inc. – Convertible Debt (6.0%, Due 6/2022)(E)(F)

   $ 198     $ 198      $ 13  

Preferred Equity – 4.2%

       

Automobile – 0.0%

       

Sea Link International IRB, Inc. – Preferred Stock(E)(G)

     98,039       98        116  

Beverage, Food, and Tobacco – 0.0%

       

Triple H Food Processors, LLC – Preferred Stock(E)(G)

     75       75        90  

Buildings and Real Estate – 0.4%

       

GFRC 360, LLC – Preferred Stock(E)(G)

     1,000       1,025        1,153  

Diversified/Conglomerate Service – 2.6%

       

Frontier Financial Group Inc. – Preferred Stock(E)(G)

     766       500        —    

Frontier Financial Group Inc. – Preferred Stock Warrant(E)(G)

     168       —          —    

MCG Energy Solutions, LLC – Preferred Stock (10.0% PIK)(E)

     7,000,000       7,000        7,000  
    

 

 

    

 

 

 
       7,500        7,000  

Oil and Gas – 0.3%

       

FES Resources Holdings LLC – Preferred Equity Units(E)(G)

     6,350       6,350        —    

Imperative Holdings Corporation – Preferred Equity Units(E)(G)

     13,740       632        870  
    

 

 

    

 

 

 
       6,982        870  

Telecommunications – 0.9%

       

B+T Group Acquisition, Inc.(S) – Preferred Stock(E)(G)

     6,130       2,024        —    

NetFortris Corp. – Preferred Stock(E)(G)

     7,890,860       789        2,074  
    

 

 

    

 

 

 
       2,813        2,074  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 18,493      $ 11,303  
    

 

 

    

 

 

 

Common Equity – 13.1%

       

Aerospace and Defense – 3.4%

       

Antenna Research Associates, Inc. – Common Equity Units(E)(G)

     4,283     $ 4,283      $ 8,153  

Ohio Armor Holdings, LLC – Common Equity(E)(G)

     1,000       1,000        1,000  
    

 

 

    

 

 

 
       5,283        9,153  

Automobile– 0.2%

       

Sea Link International IRB, Inc.– Common Equity Units(E)(G)

     823,333       823        582  

Beverage, Food, and Tobacco – 0.4%

       

Triple H Food Processors, LLC – Common Stock(E)(G)

     250,000       250        1,087  

Buildings and Real Estate – 0.0%

       

GFRC 360, LLC – Common Stock Warrants(E)(G)

     45.0     —          —    

Cargo Transportation – 4.2%

       

AG Transportation Holdings, LLC – Member Profit Participation(Q)

     27.0     1,350        7,850  

AG Transportation Holdings, LLC – Profit Participation Warrants(Q)

     5.0     244        1,477  

American Trailer Rental Group LLC – Common Stock(E)(G)

     6,667       1,000        1,952  
    

 

 

    

 

 

 
       2,594        11,279  

Healthcare, Education, and Childcare – 2.0%

       

GSM MidCo LLC – Common Stock(E)(G)

     767       767        880  

Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($843 uncalled capital commitment)(G)(L)(R)

     3.5     1,499        4,629  
    

 

 

    

 

 

 
       2,266        5,509  

Machinery – 0.2%

       

Arc Drilling Holdings LLC – Common Stock(E)(G)

     15,000       1,500        218  

Precision International, LLC – Membership Unit Warrant(E)(G)

     33.3     —          307  
    

 

 

    

 

 

 
       1,500        525  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

9


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2021

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
    Cost      Fair Value  

Oil and Gas – 0.1%

       

FES Resources Holdings LLC – Common Equity Units(E)(G)

     6,233       —          —    

Total Safety Holdings, LLC – Common Equity(E)(G)

     435       499        311  
    

 

 

    

 

 

 
       499        311  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

Funko Acquisition Holdings, LLC(S) – Common Units(G)(T)

     7,178       35        96  

Telecommunications – 0.0%

       

B+T Group Acquisition, Inc.(S) – Common Stock Warrant(E)(G)

     1.5     —          —    

NetFortris Corp. – Common Stock Warrant(E)(G)

     1       1        —    
    

 

 

    

 

 

 
       1        —    

Textiles and Leather – 2.6%

       

Targus Cayman HoldCo, Ltd. – Common Stock(E)(G)

     3,076,414       2,062        6,948  
    

 

 

    

 

 

 

Total Common Equity

     $ 15,313      $ 35,490  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 435,844      $ 430,943  
    

 

 

    

 

 

 

AFFILIATE INVESTMENTS(N) – 16.2%

       

Secured First Lien Debt – 6.2%

       

Diversified/Conglomerate Manufacturing – 3.3%

       

Edge Adhesives Holdings, Inc. (S) – Line of Credit, $0 available (L + 8.0%, 10.0% Cash, Due 9/2021)(C)

   $ 680     $ 680      $ 670  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2022)(C)

     6,200       6,200        6,107  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2022)(C)

     2,000       2,000        1,970  
    

 

 

    

 

 

 
       8,880        8,747  

Diversified/Conglomerate Service – 2.9%

       

Encore Dredging Holdings, LLC – Line of Credit, $3,000 available (L + 8.0%, 9.0% Cash, Due 12/2025)(C)

     —         —          —    

Encore Dredging Holdings, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 12/2025)(C)

     8,000       8,000        7,960  
    

 

 

    

 

 

 
       8,000        7,960  
    

 

 

    

 

 

 

Total Secured First Lien Debt

     $ 16,880      $ 16,707  
    

 

 

    

 

 

 

Secured Second Lien Debt – 7.5%

       

Diversified Natural Resources, Precious Metals and Minerals – 7.5%

       

Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(C)

   $ 6,000     $ 6,000      $ 5,977  

Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(C)

     8,000       8,000        7,970  

Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(C)

     3,300       3,300        3,288  

Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(C)

     3,000       3,000        2,989  
    

 

 

    

 

 

 
       20,300        20,224  
    

 

 

    

 

 

 

Total Secured Second Lien Debt

     $ 20,300      $ 20,224  
    

 

 

    

 

 

 

Preferred Equity – 1.5%

       

Diversified/Conglomerate Manufacturing – 0.0%

       

Edge Adhesives Holdings, Inc. (S) – Preferred Stock(E)(G)

     5,466     $ 5,466      $ —    

Diversified/Conglomerate Service– 0.7%

       

Encore Dredging Holdings, LLC (S) – Preferred Stock(E)(G)

     2,000,000       2,000      $ 2,000  

Diversified Natural Resources, Precious Metals and Minerals – 0.6%

       

Lignetics, Inc. – Preferred Stock(E)(G)

     68,880       1,321        1,617  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2%

       

Canopy Safety Brands, LLC – Preferred Stock(E)(G)

     500,000       500        670  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 9,287      $ 4,287  
    

 

 

    

 

 

 

Common Equity – 1.0%

       

Diversified Natural Resources, Precious Metals and Minerals – 1.0%

       

Lignetics, Inc. – Common Stock(E)(G)

     152,603     $ 1,855      $ 2,590  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

Canopy Safety Brands, LLC – Common Stock(E)(G)

     500,000       —          —    
    

 

 

    

 

 

 

Total Common Equity

     $ 1,855      $ 2,590  
    

 

 

    

 

 

 

Total Affiliate Investments

     $ 48,322      $ 43,808  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

10


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2021

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

CONTROL INVESTMENTS(O) – 6.6%

        

Secured First Lien Debt – 1.7%

        

Diversified/Conglomerate Manufacturing – 1.2%

        

LWO Acquisitions Company LLC – Term Debt (L + 7.5%, 10.0% Cash, Due 6/2021)(E)

   $ 6,000      $ 6,000      $ 3,286  

LWO Acquisitions Company LLC – Term Debt (Due 6/2021)(E)(P)

     10,632        10,632        —    
     

 

 

    

 

 

 
        16,632        3,286  

Printing and Publishing – 0.5%

        

TNCP Intermediate HoldCo, LLC – Line of Credit, $700 available (8.0% Cash, Due 9/2021)(E)(F)

     1,300        1,300        1,300  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 17,932      $ 4,586  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.0%

        

Automobile– 3.0%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.0% Cash, Due 5/2026)(E)

   $ 8,065      $ 8,065      $ 8,065  

Unsecured Debt – 0.0%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Term Debt (Due 6/2023)(E)(P)

   $ 95      $ 95      $ —    

Preferred Equity – 0.1%

        

Automobile– 0.1%

        

Defiance Integrated Technologies, Inc. – Preferred Stock(E)(G)

     6,043      $ 250      $ 261  

Common Equity – 1.8%

        

Automobile– 0.2%

        

Defiance Integrated Technologies, Inc. – Common Stock(E)(G)

     33,321      $ 580      $ 599  

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Common Units(E)(G)

     921,000        921        —    

Machinery – 1.1%

        

PIC 360, LLC – Common Equity Units(E)(G)

     750        1        3,198  

Printing and Publishing – 0.5%

        

TNCP Intermediate HoldCo, LLC – Common Equity Units(E)(G)

     790,000        500        1,307  
     

 

 

    

 

 

 

Total Common Equity

      $ 2,002      $ 5,104  
     

 

 

    

 

 

 

Total Control Investments

      $ 28,344      $ 18,016  
     

 

 

    

 

 

 

TOTAL INVESTMENTS – 181.9%

      $ 512,510      $ 492,767  
     

 

 

    

 

 

 

 

(A) 

Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $440.5 million at fair value, are pledged as collateral under our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. Under the Investment Company Act of 1940, as amended (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of March 31, 2021, our investments in Leeds Novamark Capital I, L.P. (“Leeds”) and Funko Acquisition Holdings, LLC (“Funko”) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 1.0% of total investments, at fair value, as of March 31, 2021.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 0.11% as of March 31, 2021. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.

(C) 

Fair value was based on an internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC (“ICE”).

(D) 

Fair value was based on the indicative bid price on or near March 31, 2021, offered by the respective syndication agent’s trading desk.

(E) 

Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.

(F)

Debt security has a fixed interest rate.

(G) 

Security is non-income producing.

(H)

Debt security is on non-accrual status.

(I)

Reserved.

(J)

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(K)

Reserved.

(L)

There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.

(M)

Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(N)

Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

 

11


(O)

Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

(P)

Debt security does not have a stated interest rate that is payable thereon.

(Q)

Fair value was based upon the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.

(R)

Fair value was based on net asset value provided by the fund as a practical expedient.

(S)

One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.

(T)

Our investment in Funko was valued using Level 2 inputs within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(U)

The cash interest rate on this investment was indexed to 90-day LIBOR, which was 0.19% as of March 31, 2021.

(V)

The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 3.25% as of March 31, 2021.

(W)

Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(X)

Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

(Y)

Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of March 31, 2021.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

12


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

NON-CONTROL/NON-AFFILIATE INVESTMENTS(M) – 171.6%

        

Secured First Lien Debt – 85.5%

        

Aerospace and Defense – 14.3%

        

Aerospace Engineering, LLC – Line of Credit, $2,350 available (L + 7.3%, 8.3% Cash, Due 8/2025)(C)

   $ 650      $ 650      $ 650  

Aerospace Engineering, LLC – Term Debt (L + 7.3%, 8.3% Cash, Due 8/2025)(C)

     20,000        20,000        20,000  

Antenna Research Associates, Inc. – Term Debt (L + 10.0%, 12.0% Cash, 4.0% PIK, Due 11/2023)(E)

     12,672        12,672        12,672  
     

 

 

    

 

 

 
        33,322        33,322  

Beverage, Food, and Tobacco – 10.9%

        

Café Zupas – Line of Credit, $4,000 available (L + 7.4%, 8.9% Cash, Due 12/2024)(C)

     —          —          —    

Café Zupas – Delayed Draw Term Loan, $3,030 available (L + 7.4%, 8.9% Cash, Due 12/2024)(C)

     1,970        1,970        1,931  

Café Zupas – Term Debt (L + 7.4%, 8.9% Cash, Due 12/2024)(C)

     24,000        24,000        23,520  
     

 

 

    

 

 

 
        25,970        25,451  

Buildings and Real Estate – 0.7%

        

GFRC 360, LLC – Line of Credit, $500 available (L + 8.0%, 9.0% Cash, Due 9/2021)(C)

     700        700        681  

GFRC 360, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 9/2021)(C)

     1,000        1,000        973  
     

 

 

    

 

 

 
        1,700        1,654  

Diversified/Conglomerate Service – 24.9%

        

DKI Ventures, LLC – Line of Credit, $2,500 available (L + 8.3%, 9.3% Cash, 2.0% PIK, Due 12/2021)(C)

     —          —          —    

DKI Ventures, LLC – Term Debt (L + 8.3%, 9.3% Cash, 2.0% PIK, Due 12/2023)(C)

     5,971        5,971        4,523  

ENET Holdings, LLC – Term Debt (10.2% Cash, Due 12/2022)(C)(F)

     1,000        1,000        807  

ENET Holdings, LLC – Term Debt (10.2% Cash, Due 4/2025)(C)(F)

     29,000        29,000        23,417  

R2i Holdings, LLC – Line of Credit, $1,171 available (8.0% Cash, Due 12/2021)(C)(F)

     829        829        790  

R2i Holdings, LLC – Term Debt (8.0% Cash, Due 12/2023)(C)(F)

     19,625        19,625        18,693  

Vision Government Solutions, Inc. – Line of Credit, $2,500 available (L + 8.8%, 9.8% Cash, Due 12/2022)(C)

     —          —          —    

Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 12/2022)(C)

     10,100        10,066        10,036  
     

 

 

    

 

 

 
        66,491        58,266  

Healthcare, Education, and Childcare – 20.9%

        

ALS Education, LLC – Line of Credit, $4,000 available (L + 7.5%, 9.0% Cash, Due 5/2025)(C)

     —          —          —    

ALS Education, LLC – Term Debt (L + 7.5%, 9.0% Cash, Due 5/2025)(C)

     21,670        21,670        21,562  

EL Academies, Inc. – Delayed Draw Term Loan, $0 available (L + 8.0%, 9.0% Cash, Due 8/2022)(C)

     16,000        15,986        15,640  

EL Academies, Inc. – Term Debt (L + 8.0%, 9.0% Cash, Due 8/2022)(C)

     12,000        11,983        11,730  
     

 

 

    

 

 

 
        49,639        48,932  

Machinery – 2.6%

        

Arc Drilling Holdings LLC – Line of Credit, $875 available (L + 8.0%, 9.3% Cash, Due 11/2020)(C)

     125        125        121  

Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 10.8% Cash, 3.0% PIK, Due 11/2022)(C)

     5,871        5,871        5,689  

Precision International, LLC – Line of Credit, $500 available (L + 7.5%, 8.5% Cash, Due 9/2021)(C)

     —          —          —    

Precision International, LLC – Term Debt (10.0% Cash, Due 9/2021)(C)(F)

     286        286        277  
     

 

 

    

 

 

 
        6,282        6,087  

Printing and Publishing – 0.0%

        

Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 7.3% Cash, Due 2/2015)(E)(V)

     107        107        —    

Telecommunications – 11.2%

        

B+T Group Acquisition, Inc.(S) – Line of Credit, $0 available (L + 11.0%, 13.0% Cash, Due 12/2021)(C)(H)

     1,200        1,200        1,086  

B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2021)(C)(H)

     6,000        6,000        5,430  

NetFortris Corp. – Term Debt (L + 9.0%, 9.5% Cash, Due 2/2021)(C)

     23,302        23,302        19,632  
     

 

 

    

 

 

 
        30,502        26,148  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 214,013      $ 199,860  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

13


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

Secured Second Lien Debt – 72.2%

        

Automobile – 4.1%

        

Sea Link International IRB, Inc. – Term Debt (13.3% PIK, Due 3/2023)(C)(F)

   $ 10,576      $ 10,576      $ 9,518  

Beverage, Food, and Tobacco – 1.6%

        

8th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 7.9% Cash, Due 10/2026)(D)

     3,683        3,704        3,637  

Cargo Transportation – 13.1%

        

AG Transportation Holdings, LLC – Term Debt (L + 10.0%, 13.3% Cash, Due 12/2021)(C)

     13,000        12,973        12,805  

American Trailer Rental Group LLC – Term Debt (L + 8.9%, 10.4% Cash, Due 8/2025)(C)

     18,000        18,000        17,820  
     

 

 

    

 

 

 
        30,973        30,625  

Chemicals, Plastics, and Rubber – 4.7%

        

Phoenix Aromas & Essential Oils, LLC – Term Debt (L + 11.5%, 12.5% Cash, Due 5/2024)(C)

     10,012        10,012        9,911  

Vertellus Holdings LLC – Term Debt (L + 12.0%, 13.0% Cash, Due 7/2022)(C)

     1,099        1,099        1,099  
     

 

 

    

 

 

 
        11,111        11,010  

Diversified/Conglomerate Manufacturing – 13.7%

        

Magpul Industries Corp. – Term Debt (L + 11.5%, 12.5% Cash, Due 5/2026)(C)

     28,000        28,000        28,000  

Tailwind Smith Cooper Intermediate Corporation – Term Debt (L + 9.0%, 9.1% Cash, Due 5/2027)(D)

     5,000        4,776        3,887  
     

 

 

    

 

 

 
        32,776        31,887  

Diversified/Conglomerate Service – 14.9%

        

CHA Holdings, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 4/2026)(D)(U)

     3,000        2,953        2,700  

Drive Chassis Holdco, LLC – Term Debt (L + 8.3%, 8.4% Cash, Due 4/2026)(D)

     5,000        4,786        4,787  

Gray Matter Systems, LLC – Term Debt (12.0% Cash, Due 11/2023)(C)(F)

     11,100        11,100        10,906  

Keystone Acquisition Corp. – Term Debt (L + 9.3%, 10.3% Cash, Due 5/2025)(D)(U)

     4,000        3,945        3,300  

Prophet Brand Strategy – Delayed Draw Term Loan, $5,000 available (L + 8.5%, 10.5% Cash, Due 2/2025)(C)

     —          —          —    

Prophet Brand Strategy – Term Debt (L + 8.5%, 10.5% Cash, Due 2/2025)(C)

     13,000        13,000        12,984  
     

 

 

    

 

 

 
        35,784        34,677  

Healthcare, Education, and Childcare – 2.3%

        

Medical Solutions Holdings, Inc. – Term Debt (L + 8.4%, 9.4% Cash, Due 6/2025)(D)

     3,000        2,969        2,700  

Medical Solutions Holdings, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 6/2025)(D)

     3,000        2,948        2,760  
     

 

 

    

 

 

 
        5,917        5,460  

Home and Office Furnishings, Housewares and Durable Consumer Products – 4.1%

        

Belnick, Inc. – Term Debt (11.0% Cash, Due 8/2023)(C)(F)

     10,000        10,000        9,675  

Hotels, Motels, Inns, and Gaming – 3.4%

        

Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 11.0% Cash, 3.0% PIK, Due 6/2023)(C)

     8,052        8,052        8,052  

Machinery – 0.4%

        

CPM Holdings, Inc. – Term Debt (L + 8.3%, 8.4% Cash, Due 11/2026)(D)

     1,000        1,000        910  

Oil and Gas – 9.9%

        

Imperative Holdings Corporation – Term Debt (L + 10.3%, 12.3% Cash, 1.8% PIK, Due 9/2022)(C)

     27,583        27,583        23,170  
     

 

 

    

 

 

 

Total Secured Second Lien Debt

      $ 177,476      $ 168,621  
     

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

14


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
    Cost      Fair Value  

Unsecured Debt – 1.8%

       

Diversified/Conglomerate Service – 0.0%

       

Frontier Financial Group Inc. – Convertible Debt (6.0%, Due 6/2022)(E)(F)

   $ 198     $ 198      $ 17  

Healthcare, education, and childcare – 1.8%

       

Edmentum Ultimate Holdings, LLC – Term Debt (10.0% PIK, Due 12/2021)(C)(F)

     4,415       4,415        4,282  
    

 

 

    

 

 

 

Total Unsecured Debt

       $4,613        $4,299  
    

 

 

    

 

 

 

Preferred Equity – 2.0%

       

Beverage, Food, and Tobacco – 0.0%

       

Triple H Food Processors, LLC – Preferred Stock(E)(G)

     75       75        83  

Buildings and Real Estate – 0.6%

       

GFRC 360, LLC – Preferred Stock(E)(G)

     1,000       1,025        1,456  

Diversified/Conglomerate Service – 0.0%

       

Frontier Financial Group Inc. – Preferred Stock(E)(G)

     766       500        —    

Frontier Financial Group Inc. – Preferred Stock Warrant(E)(G)

     168       —          —    
    

 

 

    

 

 

 
       500        —    

Oil and Gas – 0.6%

       

FES Resources Holdings LLC – Preferred Equity Units(E)(G)

     6,350       6,350        —    

Imperative Holdings Corporation – Preferred Equity Units(E)(G)

     13,740       632        1,292  
    

 

 

    

 

 

 
       6,982        1,292  

Telecommunications – 0.8%

       

B+T Group Acquisition, Inc.(S) – Preferred Stock(E)(G)

     6,130       2,024        —    

NetFortris Corp. – Preferred Stock(E)(G)

     7,890,860       789        1,846  
    

 

 

    

 

 

 
       2,813        1,846  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 11,395      $ 4,677  
    

 

 

    

 

 

 

Common Equity – 10.1%

       

Aerospace and Defense – 1.8%

       

Antenna Research Associates, Inc. – Common Equity Units(E)(G)

     4,283     $ 4,283      $ 4,138  

Automobile– 0.1%

       

Sea Link International IRB, Inc.– Common Equity Units(E)(G)

     823,333       823        208  

Beverage, Food, and Tobacco – 0.0%

       

Triple H Food Processors, LLC – Common Stock(E)(G)

     250,000       250        —    

Buildings and Real Estate – 0.0%

       

GFRC 360, LLC – Common Stock Warrants(E)(G)

     45.0     —          —    

Cargo Transportation – 1.7%

       

AG Transportation Holdings, LLC – Member Profit Participation(E)(G)

     27.0     1,350        2,345  

AG Transportation Holdings, LLC – Profit Participation Warrants(E)(G)

     5.0     244        563  

American Trailer Rental Group LLC – Common Stock(E)(G)

     6,667       1,000        1,009  
    

 

 

    

 

 

 
       2,594        3,917  

Chemicals, Plastics, and Rubber – 1.2%

       

Vertellus Holdings LLC – Common Stock Units((E)(G)

     879,121       3,018        2,705  

Healthcare, Education, and Childcare – 2.3%

       

Edmentum Ultimate Holdings, LLC – Common Stock(E)(G)

     21,429       2,637        —    

GSM MidCo LLC – Common Stock(E)(G)

     767       767        763  

Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($843 uncalled capital commitment)(G)(L)(R)

     3.5     1,808        4,718  
    

 

 

    

 

 

 
       5,212        5,481  

Machinery – 0.4%

       

Arc Drilling Holdings LLC – Common Stock(E)(G)

     15,000       1,500        400  

Precision International, LLC – Membership Unit Warrant(E)(G)

     33.3     —          525  
    

 

 

    

 

 

 
       1,500        925  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

15


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
    Cost      Fair Value  

Oil and Gas – 0.1%

       

FES Resources Holdings LLC – Common Equity Units(E)(G)

     6,233       —          —    

Total Safety Holdings, LLC – Common Equity(E)(G)

     435       499        263  
    

 

 

    

 

 

 
       499        263  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

Funko Acquisition Holdings, LLC(S) – Common Units(G)(T)

     12,180       59        48  

Telecommunications – 0.0%

       

B+T Group Acquisition, Inc.(S) – Common Stock Warrant(E)(G)

     1.5     —          —    

NetFortris Corp. – Common Stock Warrant(E)(G)

     1       1        —    
    

 

 

    

 

 

 
       1        —    

Textiles and Leather – 2.5%

       

Targus Cayman HoldCo, Ltd. – Common Stock(E)(G)

     3,076,414       2,062        5,905  
    

 

 

    

 

 

 

Total Common Equity

     $ 20,301      $ 23,590  
    

 

 

    

 

 

 

Total Non-Control/Non-Affiliate Investments

     $ 427,798      $ 401,047  
    

 

 

    

 

 

 

AFFILIATE INVESTMENTS(N) – 14.2%

       

Secured First Lien Debt – 3.7%

       

Diversified/Conglomerate Manufacturing – 3.7%

       

Edge Adhesives Holdings, Inc. (S) – Line of Credit, $0 available (L + 8.0%, 10.0% Cash, Due 12/2020)(C)

   $ 680     $ 680      $ 663  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2022)(C)

     6,200       6,200        6,045  

Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2022)(C)

     2,000       2,000        1,950  
    

 

 

    

 

 

 
       8,880        8,658  
    

 

 

    

 

 

 

Total Secured First Lien Debt

     $ 8,880      $ 8,658  
    

 

 

    

 

 

 

Secured Second Lien Debt – 8.7%

       

Diversified Natural Resources, Precious Metals and Minerals – 8.7%

       

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 5/2025)(C)

   $ 6,000     $ 6,000      $ 6,000  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 5/2025)(C)

     8,000       8,000        8,000  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 5/2025)(C)

     3,300       3,300        3,300  

Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 5/2025)(C)

     3,000       3,000        3,000  
    

 

 

    

 

 

 
       20,300        20,300  
    

 

 

    

 

 

 

Total Secured Second Lien Debt

     $ 20,300      $ 20,300  
    

 

 

    

 

 

 

Preferred Equity – 0.9%

       

Diversified/Conglomerate Manufacturing – 0.0%

       

Edge Adhesives Holdings, Inc. (S) – Preferred Stock(E)(G)

     5,466     $ 5,466      $ —    

Diversified Natural Resources, Precious Metals and Minerals – 0.7%

       

Lignetics, Inc. – Preferred Stock(E)(G)

     68,880       1,321        1,562  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2%

       

Canopy Safety Brands, LLC – Preferred Stock(E)(G)

     500,000       500        507  
    

 

 

    

 

 

 

Total Preferred Equity

     $ 7,287      $ 2,069  
    

 

 

    

 

 

 

Common Equity – 0.9%

       

Diversified Natural Resources, Precious Metals and Minerals – 0.9%

       

Lignetics, Inc. – Common Stock(E)(G)

     152,603     $ 1,855      $ 2,152  

Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0%

       

Canopy Safety Brands, LLC – Common Stock(E)(G)

     500,000       —          —    
    

 

 

    

 

 

 

Total Common Equity

     $ 1,855      $ 2,152  
    

 

 

    

 

 

 

Total Affiliate Investments

     $ 38,322      $ 33,179  
    

 

 

    

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

16


GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2020

(DOLLAR AMOUNTS IN THOUSANDS)

 

Company and Investment(A)(B)(W)(Y)

   Principal/
Shares/
Units(J)(X)
     Cost      Fair Value  

CONTROL INVESTMENTS(O) – 6.9%

        

Secured First Lien Debt – 2.1%

        

Diversified/Conglomerate Manufacturing – 1.5%

        

LWO Acquisitions Company LLC – Term Debt (L + 7.5%, 10.0% Cash, Due 6/2021)(E)

   $ 6,000      $ 6,000      $ 3,450  

LWO Acquisitions Company LLC – Term Debt (Due 6/2021)(E)(P)

     10,632        10,632        —    
     

 

 

    

 

 

 
        16,632        3,450  

Printing and Publishing – 0.6%

        

TNCP Intermediate HoldCo, LLC – Line of Credit, $500 available (8.0% Cash, Due 9/2021)(E)(F)

     1,500        1,483        1,500  
     

 

 

    

 

 

 

Total Secured First Lien Debt

      $ 18,115      $ 4,950  
     

 

 

    

 

 

 

Secured Second Lien Debt – 3.5%

        

Automobile– 3.5%

        

Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.0% Cash, Due 5/2026)(E)

   $ 8,065      $ 8,065      $ 8,065  

Unsecured Debt – 0.0%

        

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Term Debt (Due 6/2023)(E)(P)

   $ 95      $ 95      $ —    

Preferred Equity – 0.1%

        

Automobile– 0.1%

        

Defiance Integrated Technologies, Inc. – Preferred Stock(E)(G)

     6,043      $ 250      $ 254  

Common Equity – 1.2%

        

Automobile– 0.0%

        

Defiance Integrated Technologies, Inc. – Common Stock(E)(G)

     33,321      $ 580      $ 104  

Diversified/Conglomerate Manufacturing – 0.0%

        

LWO Acquisitions Company LLC – Common Units(E)(G)

     921,000        921        —    

Machinery – 1.0%

        

PIC 360, LLC – Common Equity Units(E)(G)

     750        1        2,342  

Printing and Publishing – 0.2%

        

TNCP Intermediate HoldCo, LLC – Common Equity Units(E)(G)

     790,000        500        459  
     

 

 

    

 

 

 

Total Common Equity

      $ 2,002      $ 2,905  
     

 

 

    

 

 

 

Total Control Investments

      $ 28,527      $ 16,174  
     

 

 

    

 

 

 

TOTAL INVESTMENTS)(Z) – 192.7%

      $ 494,647      $ 450,400  
     

 

 

    

 

 

 

 

(A) 

Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $412.5 million at fair value, are pledged as collateral under our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. Under the Investment Company Act of 1940 as amended, (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2020, our investments in Leeds Novamark Capital I, L.P. (“Leeds”) and Funko Acquisition Holdings, LLC (“Funko”) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 1.1% of total investments, at fair value, as of September 30, 2020.

(B) 

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 0.15% as of September 30, 2020. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.

(C) 

Fair value was based on an internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC (“ICE”).

(D) 

Fair value was based on the indicative bid price on or near September 30, 2020, offered by the respective syndication agent’s trading desk.

(E) 

Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.

(F)

Debt security has a fixed interest rate.

(G) 

Security is non-income producing.

(H)

Debt security is on non-accrual status.

(I)

Reserved.

(J)

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

(K)

Reserved.

(L)

There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.

(M)

Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.

(N)

Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.

 

17


(O)

Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.

(P)

Debt security does not have a stated interest rate that is payable thereon.

(Q)

Reserved.

(R)

Fair value was based on net asset value provided by the fund as a practical expedient.

(S)

One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.

(T)

Our investment in Funko was valued using Level 2 inputs within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(U)

The cash interest rate on this investment was indexed to 90-day LIBOR, which was 0.23% as of September 30, 2020.

(V)

The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 3.25% as of September 30, 2020.

(W)

Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

(X)

Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

(Y)

Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2020.

(Z) 

Cumulative gross unrealized depreciation for federal income tax purposes is $68.3 million; cumulative gross unrealized appreciation for federal income tax purposes is $13.4 million. Cumulative net unrealized depreciation is $54.9 million, based on a tax cost of $504.9 million.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

 

18


GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2021

(DOLLAR AMOUNTS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and are applying the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services-Investment Companies” (“ASC 946”). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of holding certain investments pledged as collateral to our line of credit. The financial statements of Business Loan are consolidated with those of Gladstone Capital Corporation. We may also have significant subsidiaries (as defined under Rule 1-02(w)(2) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) whose financial statements are not consolidated with ours. Refer to Note 12 – Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and an SEC registered investment adviser, pursuant to an investment advisory and management agreement (as amended and/or restated from time to time, the “Advisory Agreement”). Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4—Related Party Transactions for additional information regarding these arrangements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended March 31, 2021 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2021 or any future interim periods. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the SEC on November 10, 2020.

Use of Estimates

Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements. Actual results may differ from those estimates.

 

19


Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Board Responsibility

In accordance with the 1940 Act, our board of directors (“Board of Directors”) has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily available based on our investment valuation policy (which has been approved by our Board of Directors) (the “Policy”). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials, discusses the information provided by the Valuation Team, determines whether the Valuation Team has followed the Policy, determines whether the Valuation Team’s recommended fair value is reasonable in light of the Policy, and reviews other facts and circumstances. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and determine in good faith the fair value of such investments in accordance with the Policy.

There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy, and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.

Use of Third Party Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.

ICE Data Pricing and Reference Data, LLC (“ICE”), a valuation specialist, generally provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns ICE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from ICE’s. When this occurs, our Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances before determining fair value.

We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of each of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, and whether it is reasonable in light of the Policy, and other relevant facts and circumstances before determining fair value.

Valuation Techniques

In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:

 

   

Total Enterprise Value — In determining the fair value using a TEV, the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or EBITDA); EBITDA multiples obtained from our indexing methodology whereby the original transaction EBITDA multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio

 

20


 

company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.

TEV is primarily calculated using EBITDA and EBITDA multiples; however, TEV may also be calculated using revenue and revenue multiples or a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses a DCF analysis to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.

 

   

Yield Analysis — The Valuation Team generally determines the fair value of our debt investments for which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.

 

   

Market Quotes — For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations which are corroborated by the Valuation Team (generally by using the yield analysis described above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. For securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.

 

   

Investments in Funds — For equity investments in other funds for which we cannot effectuate a sale of the fund, the Valuation Team generally determines the fair value of our invested capital at the net asset value (“NAV”) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par value. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.

In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including: the nature and realizable value of the collateral, including external parties’ guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the markets in which the portfolio company operates.

Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.

Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.

 

21


Revenue Recognition

Interest Income Recognition

Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (“OID”), and paid-in-kind (“PIK”) interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. As of March 31, 2021, loans to B+T Group Acquisition Inc. (“B+T”) were on non-accrual status with an aggregate debt cost basis of $7.2 million, or 1.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.7 million, or 1.5% of the fair value of all debt investments in our portfolio. As of September 30, 2020, loans to B+T were on non-accrual status with an aggregate debt cost basis of $7.2 million, or 1.6% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $6.5 million, or 1.6% of the fair value of all debt investments in our portfolio.

We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.

As of March 31, 2021 and September 30, 2020, we held six and five OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $39 thousand and $0.1 million during the three and six months ended March 31, 2021, respectively, and $19 thousand and $0.2 million during the three and six months ended March 31, 2020, respectively. The unamortized balance of OID investments as of March 31, 2021 and September 30, 2020 totaled $0.8 million and $0.6 million, respectively. As of each of March 31, 2021 and September 30, 2020, we had seven investments which had a PIK interest component. We recorded PIK interest income of $0.4 million and $1.0 million during the three and six months ended March 31, 2021, respectively, as compared to $0.4 million and $0.7 million during the three and six months ended March 31, 2020, respectively. We collected $1.2 million and $3.4 million in PIK interest in cash during the three and six months ended March 31, 2021, as compared to $0 during the three and six months ended March 31, 2020.

Success Fee Income Recognition

We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale, and are non-recurring.

Dividend Income Recognition

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.

Related Party Fees

We are party to the Advisory Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amended, our “Credit Facility”). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.

We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services. Refer to Note 4—Related Party Transactions for additional information regarding these related party fees and agreements.

Recent Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value” (“ASU 2018-13”), which modifies the disclosure requirements in ASC 820. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, and we adopted ASU 2018-13 effective October 1, 2020. Our adoption of ASU 2018-13 did not have a material impact on our financial position, results of operations or cash flows.

 

22


NOTE 3. INVESTMENTS

Fair Value

In accordance with ASC 820, the fair value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

 

   

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

 

   

Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

 

   

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Investments in funds measured using NAV as a practical expedient are not categorized within the fair value hierarchy.

As of each of March 31, 2021 and September 30, 2020, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs, and our investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient.

We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the six months ended March 31, 2021 and 2020, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of March 31, 2021 and September 30, 2020, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

 

           Fair Value Measurements  
     Fair Value     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of March 31, 2021:

         

Secured first lien debt

   $ 273,462     $ —        $ —       $ 273,462  

Secured second lien debt

     160,257       —          —         160,257  

Unsecured debt

     13       —          —         13  

Preferred equity

     15,851       —          —         15,851  

Common equity/equivalents

     38,555 (A)      —          96 (B)      38,459  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments at March 31, 2021

   $ 488,138     $ —        $ 96     $ 488,042  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

23


           Fair Value Measurements  
     Fair Value     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

As of September 30, 2020:

         

Secured first lien debt

   $ 213,468     $ —        $ —       $ 213,468  

Secured second lien debt

     196,986       —          —         196,986  

Unsecured debt

     4,299       —          —         4,299  

Preferred equity

     7,000       —          —         7,000  

Common equity/equivalents

     23,929 (A)      —          48 (B)      23,881  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Investments as of September 30, 2020

   $ 445,682     $ —        $ 48     $ 445,634  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(A)

Excludes our investment in Leeds with a fair value of $4.6 million and $4.7 million as of March 31, 2021 and September 30, 2020, respectively. Leeds was valued using NAV as a practical expedient.

(B)

Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to certain restrictions.

The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy and carried at fair value as of March 31, 2021 and September 30, 2020, by caption on our accompanying Consolidated Statements of Assets and Liabilities and by security type:

 

     Total Recurring Fair Value Measurements
Reported in

Consolidated Statements of Assets and Liabilities
Using Significant Unobservable Inputs

(Level 3)
 
     March 31, 2021     September 30, 2020  

Non-Control/Non-Affiliate Investments

    

Secured first lien debt

   $ 252,169     $ 199,860  

Secured second lien debt

     131,968       168,621  

Unsecured debt

     13       4,299  

Preferred equity

     11,303       4,677  

Common equity/equivalents

     30,765 (A)      18,824 (B) 
  

 

 

   

 

 

 

Total Non-Control/Non-Affiliate Investments

   $ 426,218     $ 396,281  
  

 

 

   

 

 

 

Affiliate Investments

    

Secured first lien debt

   $ 16,707     $ 8,658  

Secured second lien debt

     20,224       20,300  

Preferred equity

     4,287       2,069  

Common equity/equivalents

     2,590       2,152  
  

 

 

   

 

 

 

Total Affiliate Investments

   $ 43,808     $ 33,179  
  

 

 

   

 

 

 

Control Investments

    

Secured first lien debt

   $ 4,586     $ 4,950  

Secured second lien debt

     8,065       8,065  

Preferred equity

     261       254  

Common equity/equivalents

     5,104       2,905  
  

 

 

   

 

 

 

Total Control Investments

   $ 18,016     $ 16,174  
  

 

 

   

 

 

 

Total Investments at Fair Value Using Level 3 Inputs

   $ 488,042     $ 445,634  
  

 

 

   

 

 

 

 

(A)

Excludes our investments in Leeds and Funko with fair values of $4.6 million and $0.1 million, respectively, as of March 31, 2021. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

(B)

Excludes our investments in Leeds and Funko with fair values of $4.7 million and $48 thousand, respectively, as of September 30, 2020. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

 

24


In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2021 and September 30, 2020. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

 

     Quantitative Information about Level 3 Fair Value Measurements  
                        Range / Weighted Average as of  
     March 31,
2021
     September 30,
2020
     Valuation
Techniques/
Methodologies
     Unobservable
Input
   March 31,
2021
     September 30,
2020
 

Secured first lien debt

     $257,030        $195,846        Yield Analysis      Discount Rate     

7.5% - 28.1%

/ 12.6%

 

 

    

8.3% - 24.6%

/ 13.4%

 

 

     16,432        17,622        TEV      EBITDA multiple     

5.0x – 5.5x

/ 5.4x

 

 

    

4.8x – 4.8x

/ 4.8x

 

 

            EBITDA     

$564 - $7,949

/ $7,219

 

 

    

$6,492 - $6,492

/ $6,492

 

 

            Revenue multiple     

0.3x – 0.3x

/ 0.3x

 

 

    

0.3x – 0.3x

/ 0.3x

 

 

            Revenue     

$11,530 - $11,530

/ $11,530

 

 

    

$7,451 - $11,500

/ $11,165

 

 

Secured second lien debt(A)

     126,180        163,141        Yield Analysis      Discount Rate     

10.2% - 26.9%

/ 15.3%

 

 

    

10.5% - 25.1%

/ 14.5%

 

 

     26,012        24,681        Market Quote      IBP     

84.7% - 101.3%

/ 94.0%

 

 

    

77.7% - 98.8%

/ 89.2%

 

 

     8,065        9,164        TEV      EBITDA multiple     

5.6x – 5.6x

/ 5.6x

 

 

    

5.3x – 9.0x

/ 5.7x

 

 

            EBITDA     

$2,812 - $2,812

/ $2,812

 

 

    

$3,020 - $69,552

/ $10,999

 

 

Unsecured debt

            4,282        Yield Analysis      Discount Rate            

12.6% - 12.6%

/ 12.6%

 

 

     13        17        TEV      Revenue multiple     

0.3x – 1.4x

/ 1.0x

 

 

    

0.3x – 1.4x

/ 1.0x

 

 

            Revenue     

$816 - $11,530

/ $4,290

 

 

    

$883 - $11,500

/ $4,325

 

 

Preferred and common equity / equivalents(B)

     54,310        30,881        TEV      EBITDA multiple     

3.4x – 9.8x

/ 6.6x

 

 

    

3.0x – 9.2x

/ 6.0x

 

 

            EBITDA     

$564 -$88,306

/ $10,897

 

 

    

$483 -$88,142

/ $16,403

 

 

            Revenue multiple     

0.3x – 1.4x

/ 0.9x

 

 

    

0.3x – 1.4x

/ 0.8x

 

 

            Revenue     

$816 -$128,831

/ $47,258

 

 

    

$883 -$161,232

/ $48,273

 

 

  

 

 

    

 

 

             

Total Level 3 Investments, at Fair Value

     $488,042        $445,634              
  

 

 

    

 

 

          

 

(A)

Fair value as of March 31, 2021 includes one proprietary debt investment totaling $13.2 million, which was valued using the expected payoff amount as the unobservable input.

(B)

Fair value as of March 31, 2021 includes one proprietary equity investment totaling $9.3 million, which was valued using the expected payoff amount as the unobservable input. Fair value as of March 31, 2021 excludes our investments in Leeds and Funko with fair values of $4.6 million and $0.1 million, respectively. Fair value as of September 30, 2020 excludes our investments in Leeds and Funko with fair values of $4.7 million and $48 thousand, respectively. Leeds was valued using NAV as a practical expedient and Funko was valued using Level 2 inputs as of both March 31, 2021 and September 30, 2020.

 

25


Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields or, discount rates, or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase, respectively, in the fair value of certain of our investments.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and six months ended March 31, 2021 and 2020 for all investments for which we determine fair value using unobservable (Level 3) inputs.

 

     Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Three months ended March 31, 2021

   Secured First
Lien Debt
    Secured Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair Value as of December 31, 2020

   $ 219,921     $ 194,219     $ 15     $ 9,236     $ 24,473     $ 447,864  

Total gains (losses):

            

Net realized gain (loss)(A)

     —         —         —         —         —         —    

Net unrealized appreciation (depreciation)(B)

     1,156       2,190       (2     (385     12,986       15,945  

Reversal of prior period net depreciation (appreciation) on realization(B)

     20       (210     —         —         —         (190

New investments, repayments and settlements: (C)

            

Issuances/originations

     64,210       217       —         7,000       1,000       72,427  

Settlements/repayments

     (11,845     (36,159     —         —         —         (48,004
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2021

   $ 273,462     $ 160,257     $ 13     $ 15,851     $ 38,459     $ 488,042  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Six months ended March 31, 2021

   Secured First
Lien Debt
    Secured Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair Value as of September 30, 2020

   $ 213,468     $ 196,986     $ 4,299     $ 7,000     $ 23,881     $ 445,634  

Total gains (losses):

 

Net realized gain (loss)(A)

     —         —         —         —         (2,393     (2,393

Net unrealized appreciation (depreciation)(B)

     2,088       3,199       (4     (247     16,283       21,319  

Reversal of prior period net depreciation (appreciation) on realization(B)

     20       (210     133       —         2,950       2,893  

New investments, repayments and settlements: (C)

 

Issuances/originations

     91,414       554       113       9,098       1,000       102,179  

Settlements/repayments

     (13,528     (60,272     (4,528     —         —         (78,328

Net proceeds from sales

     —         —         —         —         (3,262     (3,262

Transfers

     (20,000     20,000       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2021

   $ 273,462     $ 160,257     $ 13     $ 15,851     $ 38,459     $ 488,042  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


     Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Three months ended March 31, 2020

   Secured First
Lien Debt
    Secured Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair Value as of December 31, 2019

   $ 215,340     $ 173,644     $ 4,049     $ 9,474     $ 22,183     $ 424,690  

Total gains (losses):

 

Net realized gain (loss)(A)

     (4,140     —         —         (1,449     2,508       (3,081

Net unrealized appreciation (depreciation)(B)

     (13,944     (14,431     (185     (5,857     (71     (34,488

Reversal of prior period net depreciation (appreciation) on realization(B)

     4,113       (20     —         1,449       (2,550     2,992  

New investments, repayments and settlements: (C)

 

Issuances/originations

     2,157       23,092       105       3,471       1,350       30,175  

Settlements/repayments

     (15,929     (7,463     —         —         —         (23,392

Net proceeds from sales

     —         —         —         —         (2,958     (2,958
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2020

   $ 187,597     $ 174,822     $ 3,969     $ 7,088     $ 20,462     $ 393,938  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  

Six months ended March 31, 2020

   Secured First
Lien Debt
    Secured Second
Lien Debt
    Unsecured
Debt
    Preferred
Equity
    Common
Equity/
Equivalents
    Total  

Fair Value as of September 30, 2019

   $ 178,213     $ 181,541     $ 3,933     $ 9,854     $ 25,104     $ 398,645  

Total gains (losses):

 

Net realized gain (loss)(A)

     (4,140     (4,409     —         (1,449     2,508       (7,490

Net unrealized appreciation (depreciation)(B)

     (14,481     (14,563     (171     (6,537     (2,992     (38,744

Reversal of prior period net depreciation (appreciation) on realization(B)

     4,113       4,287       —         1,449       (2,550     7,299  

New investments, repayments and settlements: (C)

 

Issuances/originations

     41,560       26,150       207       3,771       1,350       73,038  

Settlements/repayments

     (17,668     (18,184     —         —         —         (35,852

Net proceeds from sales

     —         —         —         —         (2,958     (2,958
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value as of March 31, 2020

   $ 187,597     $ 174,822     $ 3,969     $ 7,088     $ 20,462     $ 393,938  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A)

Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(B) 

Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(C) 

Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

 

27


Investment Activity

Proprietary Investments

As of March 31, 2021 and September 30, 2020, we held 38 and 37 proprietary investments with an aggregate fair value of $459.5 million and $411.5 million, or 93.2% and 91.4% of the total investment portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the six months ended March 31, 2021:

 

   

In December 2020, we invested $19.0 million in Effective School Solutions LLC through secured first lien debt.

 

   

In December 2020, we invested $10.0 million in Encore Dredging Holdings, LLC through a combination of secured first lien debt and equity.

 

   

In December 2020, our investment in Aerospace Engineering, LLC paid off at par for net proceeds of $20.2 million. In conjunction with the payoff, we received a prepayment fee of $0.2 million.

 

   

In February 2021, we invested $20.5 million in SpaceCo Holdings, LLC through secured first lien debt.

 

   

In February 2021, we invested $24.5 million in Ohio Armor Holdings, LLC through a combination of secured first lien debt and equity.

 

   

In February 2021, our investment in Vacation Rental Pros Property Management, LLC paid off at par for net proceeds of $8.2 million.

 

   

In March 2021, we invested $27.0 million in MCG Energy Solutions, LLC through a combination of secured first lien debt and equity.

 

   

In March 2021, our investment in Magpul Industries Corp. paid off at par for net proceeds of $28.7 million. In conjunction with the payoff, we received a prepayment fee of $0.7 million.

 

   

In March 2021, our investment in Vision Government Solutions, Inc. paid off at par for net proceeds of $9.9 million.

Syndicated Investments

As of March 31, 2021 and September 30, 2020, we held nine and 11 syndicated investments with an aggregate fair value of $33.3 million and $38.9 million, or 6.8% and 8.6% of the total investment portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the six months ended March 31, 2021:

 

   

In December 2020, our investment in Edmentum Ultimate Holdings, LLC was sold, which resulted in a realized loss of approximately $2.4 million on our equity investment. In connection with the sale, we received net cash proceeds of approximately $4.9 million, including the repayment of our debt investment of $4.6 million at par.

 

   

In December 2020, our investment in Vertellus Holdings LLC was sold, which resulted in a realized loss of approximately $41 thousand. In connection with the sale, we received net cash proceeds of approximately $4.1 million, including the repayment of our debt investment of $1.1 million at par.

Investment Concentrations

As of March 31, 2021, our investment portfolio consisted of investments in 47 portfolio companies located in 24 states in 17 different industries, with an aggregate fair value of $492.8 million. The five largest investments at fair value as of March 31, 2021 totaled $130.9 million, or 26.6% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2020 totaling $130.3 million, or 28.9% of our total investment portfolio. As of March 31, 2021 and September 30, 2020, our average investment by obligor was $10.9 million and $10.3 million at cost, respectively.

 

28


The following table outlines our investments by security type as of March 31, 2021 and September 30, 2020:

 

     March 31, 2021     September 30, 2020  
     Cost     Fair Value     Cost     Fair Value  

Secured first lien debt

   $ 298,894        58.3   $ 273,462        55.5   $ 241,008        48.7   $ 213,468        47.4

Secured second lien debt

     166,123        32.4       160,257        32.5       205,841        41.6       196,986        43.7  

Unsecured debt

     293        0.1       13        0.0       4,708        1.0       4,299        1.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt investments

     465,310        90.8       433,732        88.0       451,557        91.3       414,753        92.1  

Preferred equity

     28,030        5.5       15,851        3.2       18,932        3.8       7,000        1.5  

Common equity/equivalents

     19,170        3.7       43,184        8.8       24,158        4.9       28,647        6.4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity investments

     47,200        9.2       59,035        12.0       43,090        8.7       35,647        7.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 512,510        100.0   $ 492,767        100.0   $ 494,647        100.0   $ 450,400        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value consisted of the following industry classifications as of March 31, 2021 and September 30, 2020:

 

     March 31, 2021     September 30, 2020  

Industry Classification

   Fair Value      Percentage
of Total
Investments
    Fair Value      Percentage
of Total
Investments
 

Diversified/Conglomerate Service

   $ 117,334        23.8   $ 92,960        20.6

Healthcare, Education, and Childcare

     79,178        16.1       64,155        14.3  

Aerospace and Defense

     64,874        13.2       37,460        8.3  

Cargo Transportation

     42,553        8.6       34,542        7.7  

Beverage, Food, and Tobacco

     30,718        6.2       29,171        6.5  

Telecommunications

     29,150        5.9       27,994        6.2  

Oil and Gas

     25,043        5.1       24,725        5.5  

Diversified Natural Resources, Precious Metals, and Minerals

     24,431        5.0       24,014        5.3  

Automobile

     19,381        3.9       18,149        4.0  

Diversified/Conglomerate Manufacturing

     16,267        3.3       43,995        9.8  

Machinery

     10,823        2.2       10,264        2.3  

Chemicals, Plastics, and Rubber

     10,012        2.0       13,715        3.0  

Home and Office Furnishings, Housewares, and Durable Consumer Products

     9,850        2.0       9,675        2.2  

Textiles and Leather

     6,948        1.4       5,905        1.3  

Hotels, Motels, Inns, and Gaming

            0.0       8,052        1.8  

Other, < 2.0%

     6,205        1.3       5,624        1.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 492,767        100.0   $ 450,400        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Our investments at fair value were included in the following U.S. geographic regions as of March 31, 2021 and September 30, 2020:

 

     March 31, 2021     September 30, 2020  

Location

   Fair
Value
     Percentage of
Total Investments
    Fair
Value
     Percentage of
Total Investments
 

South

   $ 193,807        39.3   $ 214,808        47.7

West

     143,344        29.1       138,746        30.8  

Midwest

     107,924        21.9       56,106        12.5  

Northeast

     47,692        9.7       40,740        9.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investments

   $ 492,767        100.0   $ 450,400        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2021:

 

          Amount  

For the remaining six months ending September 30:

   2021    $ 46,991  

For the fiscal years ending September 30:

   2022      88,044  
   2023      32,094  
   2024      45,677  
   2025      113,275  
   Thereafter      140,119  
     

 

 

 
  

Total contractual repayments

   $ 466,200  
   Adjustments to cost basis of debt investments      (890)  
   Investments in equity securities      47,200  
     

 

 

 
  

Investments held as of March 31, 2021 at cost:

   $ 512,510  
     

 

 

 

 

29


Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of March 31, 2021 and September 30, 2020, we had gross receivables from portfolio companies of $0.5 million and $0.4 million, respectively. The allowance for uncollectible receivables was $0 and $11 thousand as of March 31, 2021 and September 30, 2020, respectively.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with the Adviser

We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services. On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the renewal of the Advisory Agreement through August 31, 2021.

We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility. The entire loan servicing fee paid to the Adviser by Business Loan is non-contractually, unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated subsidiary of ours, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings) during any given fiscal year pursuant to the Advisory Agreement.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer), serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as executive vice president of private equity (debt) of the Adviser. Michael LiCalsi, our general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary), is also the executive vice president of administration of our Adviser.

The following table summarizes the base management fee, incentive fee, and loan servicing fee and associated non-contractual, unconditional and irrevocable credits reflected in our accompanying Consolidated Statements of Operations:

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2021     2020     2021     2020  

Average total assets subject to base management fee(A)

   $ 478,857     $ 420,571     $ 468,229     $ 421,943  

Multiplied by prorated annual base management fee of 1.75%

     0.4375     0.4375     0.875     0.875
  

 

 

   

 

 

   

 

 

   

 

 

 

Base management fee(B)

   $ 2,095     $ 1,840     $ 4,097     $ 3,692  

Portfolio company fee credit

     (574     (263     (926     (615

Syndicated loan fee credit

     (81     (101     (168     (222
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Base Management Fee

   $ 1,440     $ 1,476     $ 3,003     $ 2,855  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loan servicing fee(B)

     1,396       1,443       2,744       2,846  

Credit to base management fee - loan servicing fee(B)

     (1,396     (1,443     (2,744     (2,846
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loan Servicing Fee

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee(B)

     1,381       1,227       2,748       2,621  

Incentive fee credit

     (225     (1,641     (436     (2,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Incentive Fee

   $ 1,156     $ (414   $ 2,312     $ 140  
  

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio company fee credit

     (574     (263     (926     (615

Syndicated loan fee credit

     (81     (101     (168     (222

Incentive fee credit

     (225     (1,641     (436     (2,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Credits to Fees From Adviser - other(B)

   $ (880   $ (2,005   $ (1,530   $ (3,318
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) 

Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period.

(B)

Reflected as a line item on our accompanying Consolidated Statements of Operations.

 

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Base Management Fee

The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees for such services against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $15 thousand for each of the three and six months ended March 31, 2021 and $0 and $15 thousand for the three and six months ended March 31, 2020, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.

Our Board of Directors accepted a non-contractual, unconditional, and irrevocable credit from the Adviser to reduce the annual base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the three and six months ended March 31, 2021 and 2020.

Loan Servicing Fee

The Adviser also services the loans held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility. As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to the Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% non-contractually, unconditionally and irrevocably credited back to us by the Adviser.

Incentive Fee

The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% (2.0% during the period from April 1, 2020 through March 31, 2022) of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:

 

no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;

 

100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2021) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter; and

 

20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.

As reflected above, on April 14, 2020, our Board of Directors approved an amendment of the Advisory Agreement, which temporarily revised the hurdle rate, for the period beginning April 1, 2020 and ending March 31, 2021, increasing the hurdle rate from 1.75% per quarter (7% annualized) to 2.00% per quarter (8% annualized) and increasing the excess incentive fee hurdle rate from 2.1875% per quarter (8.75% annualized) to 2.4375% per quarter (9.75% annualized). On April 13, 2021, our Board of Directors approved an additional amendment of the Advisory Agreement which extended the temporary revision to the hurdle rate through the period beginning April 1, 2021 and ending March 31, 2022. See “Note 13 – Subsequent Events” below.

 

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The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our “net realized capital gains” (as defined herein) as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate “net realized capital gains” at the end of each applicable year by subtracting the sum of our cumulative aggregate realized capital losses and our entire portfolio’s aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through March 31, 2021, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

In accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation and depreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through March 31, 2021.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the three and six months ended March 31, 2021 and 2020.

Transactions with the Administrator

We have entered into the Administration Agreement with the Administrator to provide administrative services. We reimburse the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The Administrator’s expenses are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including: our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary) and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone. Another of our officers, Michael LiCalsi (our general counsel and secretary), serves as the Administrator’s president as well as the executive vice president of administration for the Adviser.

Our allocable portion of the Administrator’s expenses is generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the renewal of the Administration Agreement through August 31, 2021.

Other Transactions

Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.3 million and $0.4 million during the three and six months ended March 31, 2021, respectively, and $0.1 million and $0.5 million during the three and six months ended March 31, 2020, respectively.

 

32


Related Party Fees Due

Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:

 

     March 31, 2021      September 30, 2020  

Base management fee due to Adviser

   $ 45      $ 95  

Loan servicing fee due to Adviser

     341        355  

Incentive fee due to Adviser

     1,156        1,236  
  

 

 

    

 

 

 

Total fees due to Adviser

     1,542        1,686  
  

 

 

    

 

 

 

Fee due to Administrator

     496        329  
  

 

 

    

 

 

 

Total Related Party Fees Due

   $ 2,038      $ 2,015  
  

 

 

    

 

 

 

In addition to the above fees, other operating expenses due to the Adviser as of March 31, 2021 and September 30, 2020, totaled $49 thousand and $31 thousand, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $16 thousand and $0 as of March 31, 2021 and September 30, 2020, respectively. These amounts are generally settled in the quarter subsequent to being incurred and are included in other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2021 and September 30, 2020.

 

33


NOTE 5. BORROWINGS

Revolving Credit Facility

On December 9, 2020, we, through Business Loan, entered into Amendment No. 8 to our Credit Facility with KeyBank, which increased the commitment amount from $180 million to $205 million. All principal and interest will continue to be due and payable on April 15, 2022. On November 2, 2020, we, through Business Loan, entered into Amendment No. 7 to our Credit Facility with KeyBank, which provided consent for relevant amendments to our credit agreements with certain of our portfolio companies. On April 29, 2020, we, through Business Loan, entered into Amendment No. 6 to our Credit Facility with KeyBank, which extended the revolving period end date to July 15, 2021, included certain LIBOR transition provisions and decreased the commitment amount from $190 million to $180 million.

On July 10, 2019, we, through Business Loan, entered into Amendment No. 5 to our Credit Facility with KeyBank, which (i) modified the covenants to reduce our minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), (ii) amended the excess concentration limits definition to decrease the limit for non-first lien loans from 60% to 50% under certain circumstances and (iii) amended the distributions covenant to allow a distribution to be applied towards the redemption of our 6.00% Series 2024 Term Preferred Stock, par value $0.001 per share (“Series 2024 Term Preferred Stock”).

On March 9, 2018, we, through Business Loan, entered into Amendment No. 4 to our Credit Facility with KeyBank, which increased the commitment amount from $170.0 million to $190.0 million, extended the revolving period end date by approximately two years to January 15, 2021, decreased the marginal interest rate added to 30-day LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.2 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of July 15, 2021.

The following tables summarize noteworthy information related to our Credit Facility:

 

     March 31, 2021      September 30, 2020  

Commitment amount

   $ 205,000      $ 180,000  

Borrowings outstanding, at cost

     41,200        128,000  

Availability(A)

     140,490        17,641  

 

     For the Three Months
Ended March 31,
    For the Six Months
Ended March 31,
 
     2021     2020     2021     2020  

Weighted average borrowings outstanding, at cost

   $ 69,418     $ 89,482     $ 87,442     $ 88,817  

Weighted average interest rate(B)

     4.6     5.3     4.0     5.3

Commitment (unused) fees incurred

   $ 272     $ 183     $ 424     $ 373  

 

(A) 

Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.

(B)

Includes unused commitment fees and excludes the impact of deferred financing fees.

Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once each month. Amounts collected in the lockbox account with KeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as of March 31, 2021 and September 30, 2020.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.

 

34


Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $324.0 million as of March 31, 2021, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of March 31, 2021, and as defined in our Credit Facility, we had a net worth of $457.0 million, asset coverage on our “senior securities representing indebtedness” of 215.5%, calculated in accordance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 31 obligors in our Credit Facility’s borrowing base as of March 31, 2021. As of March 31, 2021, we were in compliance with all of our Credit Facility covenants.

Fair Value

We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of March 31, 2021, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 2.94% per annum, plus a 1.00% unused commitment fee. As of September 30, 2020, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.20% per annum, plus a 0.50% unused commitment fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of our Credit Facility. As of March 31, 2021 and September 30, 2020, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.

The following tables present our Credit Facility carried at fair value as of March 31, 2021 and September 30, 2020, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three and six months ended March 31, 2021 and 2020:

 

     Total Recurring Fair Value Measurement Reported in  
     Consolidated Statements of Assets and Liabilities Using
Significant Unobservable Inputs (Level 3)
 
     March 31, 2021      September 30, 2020  

Credit Facility

   $ 41,190      $ 127,650  
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)

 
     Three Months Ended
March 31,
 
     2021      2020  

Fair value as of December 31, 2020 and 2019, respectively

   $ 16,270      $ 90,984  

Borrowings

     136,100        32,900  

Repayments

     (111,200      (31,600

Net unrealized appreciation(A)

     20        (184
  

 

 

    

 

 

 

Fair Value as of March 31, 2021 and 2020, respectively

   $ 41,190      $ 92,100  
  

 

 

    

 

 

 

 

Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)

 
     Six Months Ended
March 31,
 
     2021      2020  

Fair value as of September 30, 2020 and 2019, respectively

   $ 127,650      $ 67,067  

Borrowings

     157,600        117,200  

Repayments

     (244,400      (92,000

Net unrealized appreciation(A)

     340        (167
  

 

 

    

 

 

 

Fair Value as of March 31, 2021 and 2020, respectively

   $ 41,190      $ 92,100  
  

 

 

    

 

 

 

 

(A) 

Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and six months ended March 31, 2021 and 2020.

The fair value of the collateral under our Credit Facility totaled approximately $440.5 million and $412.5 million as of March 31, 2021 and September 30, 2020, respectively.

 

35


Notes Payable

In December 2020, we completed a debt offering of $100.0 million aggregate principal amount of 5.125% Notes due 2026 (the “2026 Notes”) for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed a debt offering of an additional $50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year) beginning July 31, 2021.

In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. The 2024 Notes are traded under the ticker symbol “GLADL” on the Nasdaq Global Select Market (“Nasdaq”). The 2024 Notes and will mature on November 1, 2024 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 1, 2021. The 2024 Notes bear interest at a rate of 5.375% per year, payable quarterly on February 1, May 1, August 1, and November 1 of each year (which equates to approximately $2.1 million per year).

In November 2018, we completed a public debt offering of $57.5 million aggregate principal amount of 6.125% Notes due 2023 (the “2023 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of $55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. On January 7, 2021, we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of $57.5 million. The redemption amount was $58.1 million inclusive of accrued interest through the date of redemption. In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of $1.2 million, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The 2023 Notes would have otherwise matured on November 1, 2023.

The indenture relating to the 2026 Notes and the 2024 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes and the 2024 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The 2026 Notes and 2024 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities.

The fair value, based on the last quoted closing price, of the 2024 Notes as of March 31, 2021 and September 30, 2020 was $39.9 million and $38.7 million, respectively. We consider the trading price of the 2024 Notes to be a Level 1 input within the ASC 820 hierarchy. The fair value, based on a DCF analysis, of the 2026 Notes as of March 31, 2021 was $155.5 million. We consider the 2026 Notes to be Level 3 within the ASC 820 fair value hierarchy.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In September 2017, we completed a public offering of approximately 2.1 million shares of our Series 2024 Term Preferred Stock at a public offering price of $25.00 per share. The shares of our Series 2024 Term Preferred Stock were traded under the ticker symbol “GLADN” on Nasdaq as of September 30, 2019.

On October 2, 2019, we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of $25.00 per share, which represents the liquidation preference per share, plus accrued and unpaid dividends through October 1, 2019 in the amount of $0.004166 per share, for a total payment per share of $25.004166 and an aggregate redemption price of approximately $51.8 million. In connection with the voluntary redemption of our Series 2024 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.4 million, which has been reflected in Realized loss on other in our accompanying Consolidated Statement of Operations and which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS

Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of March 31, 2021, we had the ability to issue up to an additional $65.8 million in securities under the registration statement.

 

36


Common Stock Offerings

In February 2019, we entered into an equity distribution agreement with Jefferies LLC (the “Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, up to an aggregate offering price of $50.0 million shares of our common stock. During the six months ended March 31, 2021, we sold 1,829,576 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $9.03 per share and raised $16.5 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $16.2 million. As of March 31, 2021, we had a remaining capacity to sell up to an additional $4.6 million of our common stock under the Jefferies Sales Agreement.

NOTE 8. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED AVERAGE COMMON SHARE

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three and six months ended March 31, 2021 and 2020:

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2021      2020     2021      2020  

Numerator: basic and diluted net increase (decrease) in net assets resulting from operations per common share

   $ 21,299      $ (27,775   $ 33,602      $ (27,077

Denominator: basic and diluted weighted average common share

     32,765,980        31,145,484       32,428,089        30,827,780  
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic and diluted net increase (decrease) in net assets resulting from operations per common share

   $ 0.65      $ (0.89   $ 1.03      $ (0.87
  

 

 

    

 

 

   

 

 

    

 

 

 

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”). The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.

The federal income tax characteristics of all distributions will be reported to stockholders on the IRS Form 1099 after the end of each calendar year. For the calendar year ended December 31, 2020, 97.3% of distributions to common stockholders were deemed to be paid from ordinary income and 2.7% of distributions to common stockholders were deemed to be a return of capital for 1099 stockholder reporting purposes. For the calendar year ended December 31, 2019, 97.4% of distributions to common stockholders were deemed to be paid from ordinary income and 2.6% of distributions to common stockholders were deemed to be a return of capital for 1099 stockholder reporting purposes.

We paid the following monthly distributions to common stockholders for the six months ended March 31, 2021 and 2020:

 

Fiscal Year

  

Declaration Date

  

Record Date

  

Payment Date

   Distribution per
Common Share
 

2021

   October 13, 2020   

October 23, 2020

  

October 30, 2020

   $ 0.065  
   October 13, 2020   

November 20, 2020

  

November 30, 2020

     0.065  
   October 13, 2020   

December 23, 2020

  

December 31, 2020

     0.065  
   January 12, 2021   

January 22, 2021

  

January 29, 2021

     0.065  
   January 12, 2021   

February 17, 2021

  

February 26, 2021

     0.065  
   January 12, 2021   

March 18, 2021